Zoom, the video conferencing startup which managed to beat Cisco’s WebEx at its own game, recently went public. Leaving the IPO aside, there was a lot of media attention on Zoom’s history as a company, since it very much broke the stereotype of the ‘hot Silicon Valley startup’.

Before Zoom arrived on the scene, many thought that the problem of video conferencing had been solved thanks to Cisco’s WebEx and Skype. But that’s not what Eric Yuan thought. A founding engineer on the WebEx team, Eric was passionate about building a video conferencing solution that just worked. He tried to implement his ideas at WebEx, but his bosses didn’t want to listen, and Eric left WebEx to found Zoom.

Eric Yuan, founder of Zoom / Source: Thrive Global

Having looked at Zoom’s growth from afar, here’s what we think all other startups can learn from Zoom

Be focused on the product, maniacally

This story about how focused Zoom is on improving its product comes directly from Sequoia Capital, one of Zoom’s investors. But before they became an investor, Sequoia was a paying customer of Zoom.

“When Sequoia first reached out to Eric in 2014, he told us he admired our work but wasn’t looking for funding. Then he asked for an intro to our IT department, to see if they’d be interested in using Zoom. He cared more about our business than he did about our money — because he was, as he is today, singularly focused on his mission of making people happy.”

-Carl Eschenbach & Pat Grady, Sequoia Capital

Many early-stage startups suffer from a tendency to focus on securing funding, instead of focusing on their product and acquiring paying customers. But Zoom’s approach of focusing on acquiring paying customers, which indirectly gave them more leverage when negotiating with investors later.

To exhibit how focused Zoom is on making its product good, consider this. In a recent feature on Zoom, Forbes columnist Alex Conrad wrote that Zoom could operate well even on a connection with 40% packet loss, which is a boon for those on spotty or slow connections.

Zoom’s platform / Source: Company S-1

Build sustainable revenue streams

In Silicon Valley, there is a tendency to chase revenue growth which is usually fuelled by deep discounts and/or by running at a loss. A ready example can be found in the meal delivery startup sector, where profitability remains elusive yet discounts, plentiful. Essentially, most startups in the sector are hemorrhaging money to make a little bit of money or no money at all. Worse yet, some will never see a cent in profits for a very, very long time. Not so with Zoom.

Consider the following, taken from the second page of Zoom’s S-1 document:

“Our revenue was $60.8 million, $151.5 million and $330.5 million for the fiscal years ended January 31, 2017, 2018 and 2019, respectively, representing annual revenue growth of 149% and 118% in fiscal 2018 and fiscal 2019, respectively.”

But the next section makes things even more interesting:

“We had a net loss of $0.0 million and $3.8 million for the fiscal years ended January 31, 2017, and 2018, respectively, and net income of $7.6 million for the fiscal year ended January 31, 2019.”

Simply put, Zoom was already a profitable company when it sought to list its shares, a rare achievement in the startup world. For comparison, look at the finances of some other startups which went public in recent times:

  • Pinterest, who filed on March 22nd, the same day as Zoom, made $755M in revenue in the fiscal year 2018 but a net loss of $63M.
  • PagerDuty, who filed on March 16th, made $79.6M revenue in the fiscal year 2018, but a net loss of $38.1M.
  • Lyft, who filed on March 1st, made $2.2B revenue in the fiscal year 2019, but a net loss of $911.3M.

In the technology world, running at a loss in order to get a shot at an IPO is widely considered a necessary evil. But Zoom was comfortably in the black, which allowed the company to list at a valuation of USD 8.98 billion.

Zoom’s financials remain healthy / Source: Forbes

Your users can be your best evangelists

Zoom credits its growth to its bottom-up user generation cycle, which conceptually, shares a few similarities with Dropbox’s famous referral system. With Zoom, users can sign up and invite others to a meeting (for free) and when they realize how easy-to-use and great the product is, they sign up too and then pay for more features.

Zoom’s S-1 states that amongst others, the company had 344 customers who generated more than $100K in annual revenue, up 141% YoY. This customer segment accounted for 30% of Zoom’s revenues in FY’19. 55% of those 344 customers started with at least one free host prior to subscribing. As more and more customers invite people to meetings held on Zoom, those numbers are only going to rise. Consider this quote from a Sequoia spokesperson:

“We had been watching the video conferencing space for many years because we were convinced that it was a huge market primed for innovation. But we couldn’t find a product that customers loved to use. That changed when our portfolio companies started raving to us about Zoom.”

Execution matters

When Eric Yuan decided to build Zoom, the problem of video conferencing was, for all intents and purposes, considered to be solved. There were many incumbents, ranging from WebEx to Skype and Google Hangouts. But they were full of problems. Some were built for an age where video conferencing was done in front of a computer, some didn’t have features such as file sharing from mobile, etc. In trying to build a better video conferencing product that truly lived off the cloud, and scaled simply and scaled well, Zoom did not try to reinvent the wheel. Instead, they just set out to make a motorized car while the rest of the world was content to ride on horse-drawn carriages. Unsurprisingly, Zoom is a company favoured by Social Capital CEO Chamath Palihapitiya, who ranks it on the same level as Slack, another successful tech startup (of which Palihapitiya is an investor).

If you’re building a startup yourself, we highly recommend that you keep an eye on Eric and his team. In the meantime, if you are a user of Zoom, what was your experience with the product like? Do you think Zoom will become the next Slack? Let us know in the comments!

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